MC Investigates: Unlicensed actors are managing hundreds of crores for investors

In India, to manage someone’s money, an entity needs to be licensed as a mutual fund, a portfolio management service or an alternative investment fund. (Representative image)

With outrage on social-media channels over fake stock-market gurus, one big and illegal business has run into trouble.

The business is of managing another’s money without the requisite licence, and after social-media handles have called out a few of the trader-influencers, the latter’s clients are panicking and asking for their money to be returned.

On one of the social-media handles, a voice recording of a phone call has been shared, in which one person can be heard threatening the other with kidnapping and violence. According to the handle, this is a hired thug warning off an investor who asked for their money back.

This was just one of the instances that the reporter was referred to. In conversations with others, a few trader-influencers spoke about getting calls from their clients demanding their money back and other market participants spoke of investors who were being coerced to withdraw complaints filed against such money managers.

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But what is this business itself?

None of the people Moneycontrol spoke to for this story wanted to be named, but the oft-repeated quote was that this is widely known and a common practice for well-known traders to manage someone’s money even though the traders do not have the licence to do so.

It is now known that some of these traders are running illegal advisories through social-media platforms such as YouTube and Telegram. These advisories are being called out by social-media handles and news reports for giving stock tips, despite not being a Sebi-registered research advisor or research analyst. But illegal advisories only give trading calls. What Moneycontrol has learnt that the involvement of unlicensed players can go a step further—such traders actually place the trades for clients. The danger is that money is being managed by people who may not have the competence to do the job but may be simply great at selling their story, and that they cannot be held accountable if the trades go wrong. Small investors seem to be particularly vulnerable to this scam because they operate on smaller capital and therefore are easily drawn to promises of multibagger returns.

“There are many families that I know have lost money in this way. The trader takes their few lakhs and all is well in a good market. But, when things go wrong, the trader vanishes and the family feel they cannot approach any legal authority for recourse,” said a well-respected trader.

In India, to manage someone’s money, an entity needs to be licensed as a mutual fund, a portfolio management service or an alternative investment fund. But to set one of these up, the regulatory and capital requirements are daunting. Therefore, the easiest way is to have an informal arrangement with a client.

But why do clients approach such unlicensed actors? For one, there is the superior returns that are promised, for another alternatives have a high-entry barrier in minimum investment limit. According to an insider, compliance requirements for alternatives too can be restrictive in terms of trading practices.

Running the scam

Illegal money management can be done in two ways. Say one person has a lot of money but does not know how to trade or invest to make that money grow. Then he/she can hand over the username and password of their trading account to this well-known trader. Second way to do it is that the client transfers the money itself to the trader’s bank account and the trader manages it through this pooled account, which will have money from various clients.

This money manager can be in charge of hundreds of crores and earn a commission of around 30% on the profit. An insider said that he has seen people managing Rs 200 crore to Rs 300 crore on an average and the highest at Rs 2,000 crore.

One trader and social-media influencer had run a YouTube live in which the viewers could see Rs 200 crore in his account, which people called out as pooled money of other investors.

“This (pooled money) is dangerous since this money is entirely in the hands of the trader and the trader has been known to vanish with the money. So many people from lower-income families have lost money to such scamsters,” another insider said.

According to this person, the safer way would be to share the user name and password with the trader and to allow the trader to buy-and-sell through the client’s account. “If you change your mind, you just have to change your password,” he said.

To allow a trader to do this--that is, place trades for hundreds of clients--there are software that can be bought in the market. According to an industry expert, these can be bought for as low as Rs 5,000.

“To do this, the trader will first register as a sub-broker and then tell the brokerage that he is having trouble placing trades for a large number of clients. Then, the broker will put this person in touch with the software vendor,” said a person, requesting anonymity.

While the trader earns a part of the profit earned by the client, he/she takes the sub-broker licence to earn the brokerage fee too.

How is the message sent out?

To advertise their services, some traders routinely conduct live sessions of their trading. Session invites are sent out on social-media, and prospective clients can see how this trader is managing large sums of money and how well. The interested parties then reach out through any of the social-media channels on which this trader is present in.

Also read: To fake MTM screenshots, small investors are most vulnerable: Sensibull's Abid Hassan

Another side to this story is that many of the well-known trader-influencers do not actually know how to trade well. But, because of their popularity, clients may approach them with a request to manage their money. In this case, the well-known trader then sub-contracts this to someone who does know how to make good trades. The client has no idea that a third-party has been involved.

It can work the other way too.

Trader groups who know how to place good trades but do not have a good social-media presence may approach a trader-influencer, to help bait clients. The trader group will offer the influencer the marked-to-market (MTM) statements of their successful trades, so that the influencer can use those statements to advertise his/her ‘proficiency’. Seeing this, a person with a lot of money may approach this influencer asking them to manage their money. The influencer will then pass the business lead on to the traders group and the influencer gets a cut for bringing them business.

With social-media now asking trader-influencers to share their verified MTMs, many are shying away from sharing theirs because the statements may reveal their client’s or real-trader-partner’s name on it.

Therefore, it is not uncommon to find Twitter users saying that they have no problem with sharing the verified MTM statement but the name on the statement needs to be hidden “for privacy” or “for personal reasons”.